the NYT article on Promethean AND MSTR btw,my conjecture for todays action Monday's action on MSTR,was big money shorts rushing to cover on a FALSE rumor MSTR had been absolved by SEC--they haven't--they are not under investigation on SB-1 issues,but for more serious SEC registration violations
<<June 25, 2000
MARKET WATCH
Not Every Investment Is a Vote of Confidence
By GRETCHEN MORGENSON
NEW YORK -- On June 9, shares of MicroStrategy Inc. soared 41 percent on talk that the company, a financially troubled software maker, would get financing from outside investors.
Last Monday, a group led by Promethean Asset Management invested $125 million in convertible preferred stock that will give it a 4 percent stake in the company. By Friday, MicroStrategy's stock had fallen 20 percent.
What gives? Investors doing some investigation may be spooked by the details. A handful of companies in similar deals have troubling stories to tell.
Last October, RoweCom, an Internet company in Westwood, Mass., raised $20 million from Promethean and other investors. Seven months later, out of concern for shareholders, the company redeemed the securities. Paul Burmeister, RoweCom's chief financial officer, said he would never do another such deal. "The downside offers too much risk to existing equity holders," he said.
To be sure, raising money with convertibles gives struggling companies cash they need. Their attraction grows as investors in plain vanilla stocks get pickier. And they are; witness the 19 percent drop in Amazon.com's stock on Friday.
Companies go into these deals hoping to thrive. If the stock goes up, the investors may be content to collect the dividends on their preferred shares. Management has some control over when the private investors can convert their holdings into common stock, and hence over the dilution to existing shareholders.
But if the company's stock price falls to a certain level, called a trigger, the investor can convert at will. Then, shareholder dilution gets really nasty, because the lower the stock price, the greater the stake that the investors get in the company. The preferred investors' interests are counter to those of common stock holders.
For instance, Proxymed Inc., a health care information services company, raised $15 million in convertible preferred stock with Promethean and other investors last December. When the company's stock fell below the $4.21 trigger price, it offered to redeem the securities for cash. According to the company's proxy statement, one of the investors declined, choosing instead to convert $1.7 million worth into shares of common stock that had fallen to around $1. As a result, the company's shares outstanding rose by 9.4 percent, a big dilution to existing stockholders. Proxymed officials declined to comment.
Some companies report significant increases in short selling of their stocks following such deals. In November 1998, Ariad Pharmaceuticals sold $3 million in convertible preferred stock to investors, including Promethean. The following October, Ariad sued Promethean, claiming that the firm manipulated the price of Ariad's stock by selling short its shares after the deal was struck.
According to the suit, the manipulation drove Ariad's stock from $1.81 a share to 53 cents a share between June and October 1999. The suit also said that Promethean admitted to Ariad officials that it had conducted "massive short sales" of the company's stock. The amount of shares sold short rose from 56,519 to 1.8 million after the preferred deal took place, according to the suit.
The suit was settled last January, and neither Ariad nor Promethean officials would comment. But as part of the settlement, Promethean agreed that it would not buy or sell short Ariad securities for four years.
The investors in MicroStrategy can convert their shares at any time, at a price that will be determined in the coming weeks. If they are inclined to sell the stock short, there no provisions in the deal to stop them.
Mark S. Lynch, chief financial officer of MicroStrategy, said the company had done a due diligence review of Promethean and that he was comfortable with the deal.
Asked whether Promethean would be inclined to sell MicroStrategy shares short, one partner, James F. O'Brien Jr., said, "If we ever get concerned with our investment, will we either sell or look to protect ourselves? Sure." But, he stressed, the firm is very positive about MicroStrategy.
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